Putting Hog Industry Growth in Perspective

Agricultural economists review the industry's growth over the last two decades and take a stab at what lies ahead. The structural changes and growth of the pork industry have been startling, notes John Lawrence, professor of agricultural economics at Iowa State University (ISU), who has been studying the subject with Glenn Grimes of the University of Missouri for the last 12 years. Two decades ago,

Agricultural economists review the industry's growth over the last two decades and take a stab at what lies ahead.

The structural changes and growth of the pork industry have been startling, notes John Lawrence, professor of agricultural economics at Iowa State University (ISU), who has been studying the subject with Glenn Grimes of the University of Missouri for the last 12 years.

“Two decades ago, there were hundreds of thousands of hog enterprises that were often part of diversified farming operations,” Lawrence says.

“Today, it's been estimated that fewer than 200 hog operations, marketing at least 50,000 hogs a year, sold 64% of U.S. hogs in 2006. Furthermore, another 1,450 firms with annual sales of 10,000 to 50,000 head marketed 21%; the remaining 15% of hogs were sold by firms marketing less than 10,000 hogs a year,” he adds.

Table 1 shows the estimated number of U.S. hog operations in 2006 and their market share by size category. The total number of operations, at 56,350, was based on USDA's projected number of owner operators. That number declined by 20% from the previous survey taken in 2003, Lawrence says.

Table 2 shows that in 1988, about one third of U.S. hogs were produced on farms selling less than a thousand hogs. By 2006, about two-thirds of the hogs were raised on farms marketing 50,000 head or more.

These structural changes have jointly affected the producing and packing industries, Lawrence observes. “For example, in 1988, the estimated rate of slaughter was 87.8 million head from 323,000 farms. By 2006, there were 102 million head slaughtered — 14 million head more — but on 80% fewer farms with hogs.

“That is a pretty substantial change in a rapidly changing industry,” he says. Size changes continued over short spans of time. From 2003 to 2006, the industry went from 59% of operators producing over 50,000 head marketed to 65%, a 10% increase.

Although the numbers are surprising, Lawrence says he's seen some evidence that industry growth has started to slow in the last decade, probably due to the double-digit losses producers absorbed in 1998-1999.

Still, the largest producers are getting larger and grabbing more market share, he concludes.

Contract Production Growth

Lawrence says contract hog production presents some interesting twists regarding the structure of the pork industry. In 2003, the industry had been through a rough patch. Those raising contract pigs were pretty happy because they were saved from lower prices, while the owners of those pigs were not so sure they liked contracting.

In 2006, the reverse was true. “We had been through a profitable time and prices were up. Contract growers were less than happy. They wished they were independent producers.”

Of the U.S. hogs finished in 2006, two-thirds were owned by firms that used production contracts.

Table 3 reports the estimated percentage of hogs that were produced by growers under contract in the growers' facilities. That includes an estimated 20% of U.S. farrowings and 46% of U.S. market hogs.

Overall, Lawrence says a review of the industry structure study reflects that contract growers have been very satisfied with their arrangements over the 8- to 10-year life of their contracts.

That contrasts with what critics said about hog contracts a decade or so ago, he recalls. Critics suggested that only those who couldn't raise hogs on their own raised hogs under contract. They said that contract hog barns would never last 10 years, and that contract owners would rob growers blind and leave them hanging. Many contract growers said they would become independent producers just as soon as their contracts ran out.

“Quite frankly, none of those things happened,” Lawrence says. In most cases, buildings have been well-maintained and funds have been placed into escrow to ensure that repairs and equipment replacement were done as needed.

Nearly 80% of contract growers reported in both 2003 and 2006 industry surveys that they planned to continue contracting and stay with the same company when their contracts expired.

A decade or more ago, the joke was that contract hog production was a low-paying job and you got to keep all of the manure, Lawrence recalls. Today, manure's escalating value and fertilizer's 100% increase in price in the last five years are attracting droves of grain farmers to contract hog production.

Those changes are not surprising as farmers adapt to survive.

Similarly, driving down the cost of production and adopting technologies, such as all-in, all-out and multiple-site production to improve animal health, have enabled the pork industry to expand at a dizzying rate in the last 20 years, Lawrence says.

Future Industry Structure

There's little doubt that just as the energy crisis will continue to impact the general economy, so too, will rising feed costs affect the structure and future growth of the U.S. pork industry.

Lawrence suggests that Iowa's and Minnesota's future looks fairly bright because they have a plentiful supply of fertile farmland to grow the grain to finish out a sizeable number of U.S. and Canadian pigs. In the last decade, Iowa has added 2.9 million finishing spaces, while Minnesota has added 1.6 million. And both states have suitable cropland to readily absorb manure nutrients.

However, rising feed costs will put added financial pressure on grain-deficit states and hog operations that operate there, especially the larger operations.

That may well play a huge role in keeping hog production and family-sized operations a mainstay in the Midwest, according to Lawrence.

Table 1. Estimated Total Number of U.S. Hog Operations and Share of U.S. Production in 2006, by Size Category

Category

Number of Operations

Market Share

Less than 1,000

48,434

1%

1,000-3,000

4,025

5%

3,000-5,000

1,150

3%

5,000-10,000

1,100

6%

10,000-50,000

1,450

21%

50,000-500,000

164

21%

500,000+

27

43%

Total

56,350

100%

Table 2. Share of Annual U.S. Hog Production by Year and Size Category, %

Category

1988

1991

1994

1997

2000

2003

2006

Less than 1,000

32

23

17

5

2

1

1

1,000-2,000

19

20

17

12

7

8

5

2,000-3,000

11

13

12

10

5

8

5

3,000-5,000

10

12

12

10

7

4

3

5,000-10,000

9

10

12

10

10

9

6

10,000-50,000

12

13

13

16

18

19

21

50,000+

7

9

17

37

51

59

65

Table 3. Percentage of U.S. Hogs Raised by Growers under Contract, 1997-2006